Up to the last hour before 2am last Friday, noise was abundant in the media; CNN interviewed FIs and 76% said ‘no rate hike’, Bloomberg interviewed FIs and 78% said ‘rate hike’. What perfect opposing views!
As we all know how, Janet Yellen decided not to hike rates. So what does this mean for the USA? What does it mean for the rest of the world? What does it mean for the financial markets?
Granted Janet has been talking about a rate hike since May this year and respectfully, she has managed the financial markets very well through the past 4 months. Of course, we had the great Greek distraction in the middle of the year, thanks to Tripras and the ECB and the EU and Merkel and Draghi.
In life I suppose there is always something to be said when a leader is a woman and when a leader is a man. I am not trying to be a racist here, however, it is generally known that women are more prudent, then again, if you observe how Angela Merkel works and now Janet Yellen, it is clear that Prudence is a trademark of the fairer sex. In the uncertain economic times we live in now and the divergent interest rate cycles of different economies around the world, Janet Yellen has the unenviable task of holding the stone and wondering whether she should through it into the pond and create ripples or tsunamis.
The world uses the US Dollar as a trading currency base or a settlement currency or a partial reserve currency, any rate hike in the US, will certainly have a large negative impact to Europe and other OECD countries. More importantly, it may destroy smaller Asian emerging countries, and BRICs.
Globality means that the world has grown smaller, trade borders have evaporated, which means that financial impacts will become like tsunamis and not small ripples. We saw it recently with the partial crash in the Shanghai and Shenzhen equity markets and how it affected the rest of the worlds’ financial markets. We saw how the world didn’t take kindly to China’s central government interference with the equity markets, with the banking system and with the currency.
Frankly, if I was Janet Yellen and I was faced with two options; 1) do a rate hike and run the risk of choking the economy or 2) let the economy continue to gain more momentum in growth and jobs and inflation, then, hike rates then, as a strategy of reining in the economy before excesses begin. Prudence would dictate that we should select option 2.
Let’s not forget we are talking about the United States of America, a very mature economy, highly domestic with little to export, a ballooning social welfare crisis, a runaway immigration problem and a widening wealth gap. So, even on the best quarter, economic growth as spectacular as it cld be, can be, will never be higher than 3% p.a. Since after the millennium or for that fact the past 10 years, the average growth rates has been below 2%, in the 70s and 80s, the average was about 3%.
So truly speaking, where is the concern that growth may run away and that we need to get ahead of the curve???
Noise has begun again with the media saying that Janet Yellen will raise interest rates in December. Why? Doesn’t the Chairman of the Federal Reserve know that, that is the worse time of the year do effect any interest rate decisions as liquidity is very low and volatility is very high. Remember how George Soros broke the Bank of England in 1992……….Black Wednesday?!
Prudence will dictate that Janet Yellen will only make an interest rate liftoff in March 2016, that is, towards the end of winter. Traditionally, in the U.S., jobs takes a significant dip during the winter and employment only starts picking up in spring.
What do I know? This is just me sharing my thoughts with the world and to whomever is interested to read my trading blog.
The Panthenon Investment Group 